Fear of volatile September for stocks fades

Published: Thursday, Sept. 12, 2013 4:39 p.m. CDT

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(AP photo)

Traders work on the floor at the New York Stock Exchange. World stock markets were muted Thursday as investors kept their guard up ahead of the release of U.S. retail sales data and next week's Federal Reserve policy meeting.

The prospects of a U.S. attack on Syria and less economic stimulus from the Federal Reserve only added to investor worries going into September, which historically is the worst month of the year for stocks.

Instead, the Dow Jones industrial average is up 3.3 percent so far this month, even after it slipped 26 points, to 15,300.64 on Thursday. The Standard & Poor's 500 index is up 3.1 percent this month, after falling six points Thursday to 1,683.42.

Another way to show how investors' nerves have calmed is the CBOE Volatility Index, sometimes referred to as "Wall Street's fear gauge." When the VIX, as it is better known, moves higher, it means investors expect more volatility in the next 30 days. It is down more than 15 percent this month. Gold, another signal of investor fear, is down more than five percent.

September was supposed to be bad, so what happened?

The recent de-escalation of the U.S.-Syria crisis combined with a calming in the bond market has provided fuel to lift stocks higher, market strategists and investors said.

While the ultimate fate of a U.S. attack on Syria is unknown, it looks like an immediate missile strike isn't happening soon.

Syrian President Bashar Assad said Thursday his government has agreed to surrender its chemical weapons in response to a Russian proposal.

"Syria is still there as a concern, but it's starting to de-escalate," said Richard Sichel, chief investment officer at Philadelphia Trust Co., which manages $1.9 billion in assets.

While Syria's economy is too small to have an impact on the global economy, the country is important for oil markets since a conflict there could escalate and jeopardize the flow of crude from the Middle East.

It's also important to look at what's happened in the bond market the last couple of weeks, said J.J. Kinahan, chief strategist at TD Ameritrade.

Investors had been dumping bonds most of the summer, Kinahan said, as investors prepared for the Fed to quickly wind down a bond-purchase program that had kept interest rates low for so long. The yield on the 10-year Treasury note soared from 1.63 percent in early May to 3 percent last week. Bond prices fall as yields rise.

Nearly every major debt investment in the U.S. is pegged to the 10-year note, from rates on corporate loans and home mortgages to student loans. When yields rise, it raises the cost of lending for everyone — potentially cutting into corporate profits, weighing down the stock and housing markets, and ultimately affecting the economy.

"The yield on the 10-year Treasury may be the most important number in the entire world," White said.

But after the 10-year note struck that psychologically-important three percent mark, the selloff of the notes slowed, and so did their yield.

Most investors have become more comfortable with the Fed's plan and do not believe the central bank will reduce its bond purchases as much as originally anticipated, several investors said. The Fed is buying $85 billion of bonds each month. It could limit purchases to $75 billion or $80 billion a month, instead of $55 billion.

"The bond market got ahead of itself and expected a big exit by the Fed and frankly that hasn't happened and it's unlikely it's going to happen," White said.

There are other signs of a calmer bond market. Verizon Communications sold $49 billion in bonds Wednesday, the biggest bond sale ever by a corporation. Demand was robust as bond investors placed more than $100 billion in orders for Verizon's offering. On the same day, the Treasury Department auctioned off $21 billion in fresh 10-year notes, which was also met with strong demand.

"The fact that the market was able to absorb that much supply is very important," said Eric Wiegand, senior portfolio manager for the U.S. Bank's private client reserve.

The amount of money in the U.S. bond market is around $38 trillion, roughly double the size of the U.S. stock market. So when things calm down in the bond market, it affects stocks.

Investors are looking ahead to next week, when the Fed holds its September policy meeting and will decide whether or not to pull back its bond buying and by how much.

"I cannot stress how important the (Fed meeting) is," said Kristina Hooper, Head of Investment Strategies for the U.S. at Allianz Global Investors, adding the any action the Fed may take may cause markets to be more volatile next week.